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New Zealand's Productivity Performance - TPRP 08/02

3.  Productivity performance

Economy-wide data are used to provide a big picture view of productivity, with measured sector data providing more detail.

This section examines the productivity performance of the New Zealandeconomy. Firstly, we look at productivity growth and levels across the whole economy. This economy-wide analysis provides a long-term perspective, a comparison with all members of the OECD, and a direct link to per capita incomes. Secondly, we turn to productivity growth in New Zealand’s measured sector, where productivity data are more reliable, more detailed, and can be compared directly with Australia.

Economy-wide productivity performance

The simplest way to examine labour productivity is to divide real GDP (production) in a given period by the number of actual hours worked from the Household Labour Force Survey in the same period. Hours worked are generally preferred over hours paid as workers are better able to assess actual hours worked than are employers.[6]

To reduce data volatility and seasonal variation, quarterly data are averaged over a year from the March 1988 year (when this GDP series began) to the December 2007 year (the latest data point). These productivity growth rates are not published by SNZ, although output and input data are official SNZ series.

Economy-wide labour productivity growth averaged 1.4% per annum since 1988.

Economic growth in New Zealand over the past two decades was driven by both labour input growth (ie, hours worked) and labour productivity growth (ie, output per hour). Of annual economic growth of 2.6% between the years to March 1988 and December 2007, 1.2% was from labour input growth and 1.4% was from labour productivity growth (Figure 1).

Labour productivity growth can be volatile from year to year.

Around this average, labour productivity growth is volatile over time. Since 1988, it has varied from a high of 5.5% in the June 1989 year to a fall of 0.5% in the March 1993 year. More recently, it has risen from 0.1% in the September 2005 year to 2.6% in the December 2007 year, the highest since 2000, on the back of the recent upturn in the economy.

Peaks in labour productivity growth tend to match business cycle peaks and falls in labour productivity often match troughs in the business cycle (ie, productivity is pro-cyclical). Exceptions to this rule of thumb are when labour input exhibits significant change (eg, economic growth was high in 2004, despite low labour productivity growth, and low in 1989, despite high labour productivity growth).

Figure 1: Economy-wide output and labour productivity growth (March 1989 quarter to December 2007 quarter)
Figure 1: Economy-wide output and labour productivity growth (March 1989 quarter to December 2007 quarter).
Source: The Treasury, Statistics New Zealand

A variety of methods can be used to remove short-term fluctuations and estimate trend productivity growth. These methods include moving averages, point-to-point analysis (including the peak-to-peak method), statistical filters and econometric procedures. The appropriateness of any particular method depends on the purpose for which it is being used.

For simplicity, we use moving averages for economy-wide labour productivity growth. A moving average growth rate has two advantages.[7] First, it does not require the identification of cyclical peaks, troughs, or on-trend points. Second, it is computationally easier when comparing the growth performance of different countries. This is why it is common for international agencies to report GDP and productivity as average growth rates over particular time periods. There is no ideal period over which to calculate a trend growth rate based on moving averages. If the period is too short, growth rates are likely to fluctuate considerably owing to business cycle effects. If it is too long, significant changes in performance may not be captured for some time.

There may have been some slowing of economy-wide labour productivity growth in recent years.

The moving averages in Figure 2 indicate that trend labour productivity growth, on an economy-wide basis, has been in the 1% to 2% per annum range since the early 2000s. The 10-year moving average rose from 0.8% in 1999 to 1.5% in 2003 and fell back slightly to 1.4% in 2007, while the 5-year moving average rose from 0.4% in 1996 to 1.9% in 2004, fell to 1.1% in 2006 and rose slightly to 1.2% in 2007. However, the 5-year moving average series may still be picking up business cycle effects. The 10-year moving average series has been relatively steady between 1.3% and 1.5% in recent years.

Figure 2: Economy-wide labour productivity growth (hours-worked basis, moving average calculated at each quarter)
Figure 2: Economy-wide labour productivity growth (hours-worked basis, moving average calculated at each quarter).
Source: The Treasury, Statistics New Zealand

Notes

  • [6]Hours paid from the Quarterly Employment Survey (QES), together with other sources, have been used in SNZ productivity data to provide robust industry data for disaggregating the economy (see Box 1). We use hours worked because we examine the whole economy (the QES excludes some industries), do not want to include holidays and other paid leave, and the Treasury’s forecasts are on an hours-worked basis.
  • [7]A moving average is an average calculated over a fixed time span (say 5 or 10 years), but where that fixed time span moves through time. When comparing across countries, any fixed time span that does not move through time suffers the significant drawback that it does not allow for possible differences in the timing of business cycle phases across countries.
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